Welcome to our comprehensive guide on mastering consistent futures trading strategies to thrive in any market condition. Successful futures trading requires a combination of skill, discipline, and adaptability. This blog post will delve into effective strategies that can help you navigate and capitalize on various market conditions.
Whether the market is trending, volatile, or range-bound, understanding and implementing these strategies will enhance your chances of consistent success. The beauty of these strategies is that they stay consistent regardless of the market conditions.
The key is understanding one simple concept in the market.
The volume moves price.
Section 1: Understanding Market Conditions
Before diving into specific strategies, it’s crucial to understand different market conditions that can impact futures trading. Markets can be categorized as trending, volatile, or range-bound. Depending on the information that enters the market, we can have a mix of these.
A trending market exhibits a clear upward or downward movement, making it ideal for trend-following strategies. Volatile markets experience rapid price fluctuations, creating opportunities for strategies like breakout trading.
Range-bound markets have prices confined within specific levels, presenting opportunities for range trading. The range-bound market appears about 70-80% of the time. A lot of traders get caught out here and make the biggest mistakes, ultimately failing.
By recognizing these market conditions, you can adapt your approach accordingly and align your strategies with the current market environment. Spoiler, there is one specific strategy that you can learn to trade any of these markets.
Section 2: Tools you need to create a consistent futures trading strategy
The market revolves around one key principle, that volume dictates price movement. If we can understand volume as a futures trader we can then trade the futures markets with confidence and discipline.
When big traders buy or sell futures contracts with large sizes, markets move in their direction. These are what we call strong-handed traders or institutional traders. Size moves the market. If we can find where these traders are and when they appear, we can find the market’s expected moves.
This means we can use 2 very simple tools to start trading futures.
- Volume Profile (dictates where strong-handed traders will appear)
- Depth of Market (Order Flow tool to identify when strong-handed traders will appear.
Section 3: Finding Strong-handed Traders (Volume Profile)
The volume profile is the best tool in the futures market to find key areas to trade. You can use the volume profile to identify where strong-handed traders appear.
The volume profile’s main use is differentiating between balance and imbalance. In other words, compression & expansion. Or even easier put, ranges and trends.
A volume profile has many basic features, but if we focus on a cumulative volume profile. Meaning one that has multiple days building volume one day after another. We can find areas of interest to trade.
The cumulative volume profiles we like to use:
These volume profiles allow us to identify one key aspect: distributions. Where we can get distribution theory from to help us navigate where prices are expected to move and how.
In this case, we are going to skip the use of the volume profiles:
- Point of Control
- Value area
- Value area high & low
Instead, we’re going to focus on a cumulative profiles distribution theory.
Simply put, a distribution is an area on the volume profile where many high-volume nodes are glued together and create a “belly”. This is a compression or a market range.
Look at the image below, we have two major distributions, the all-encompassing one (blue). As well as the smaller one (green). These are areas if price trades within are expected to stay within. If outside, expected to stay outside.
Distributions are areas that are trapped by a drop-off in volume, high volume node going into low volume node. This is where strong-handed traders get active in the market and the areas where we call “ledges”.
We want to find price ledges where we expectt price reversals.
When price is in balance, we trade the ledges of the balance to keep price in balance. (Range-bound market).
When price is outside of balance, we trade the ledge of the balance to keep price outside of the balance (trend market).
Here is an example of the green balance block between 4405 and 4424 on the S&P500 E-mini futures. It works extremely well on little risk.
If you want to full know how this works and how the large market participants operate check out this Youtube Video: https://youtu.be/pqwtj61JTE4
For a full breakdown of the volume profile, levels and trading plans, check out this Youtube video:
The beauty of this breakdown and using volume profile is that during market condition changes, this analysis stays consistent. During periods of market volatility or lack of, the analysis keeps in tact as a form of technical analysis.
Section 4: Finding WHEN Strong-handed Traders will appear (Depth of Market)
As a trader, you can find out when there are large market participants entering the market that will move the market in a certain direction. Some might think it’s “predicting the market” however it’s reading the information given to you and making an informed decision.
Order Flow is a tool that allows you to read the market orders that come through the market and what direction they can push price into. This is yet another form of raw market data that reflects volume.
It’s not necessarily as simple as seeing massive buyers or sellers coming in and pushing prices up or down respectively. Instead how these large market participants react with one another to give the market direction.
If there are consistent buyers, the market should go up. Especially if they’re running through the sellers. If there are consistent sellers the market should go down.
The premise is watching how these market participants interact with the levels that you find from the volume profile and where you locate distribution ledges. To be able to read these moves we have to use a depth of market.
Below is a DOM (depth of market) from the S&P500 E-mini Futures, these are index futures or equity futures.
The DOM shows many different aspects (from left to right):
- Volume Profile
- Last traded quantity on the bid
- Last traded quantity on the offer
- Volume traded on Bid/Ask
The main focus for traders at the start should be on the middle columns between the bid and the offer. These are the last traded quantities on the bid and offer. These represent market buyers and sellers that will actually move the market.
We want to notice how these interact with each other to get an idea of who actually holds strength in the market. The red column is bid hitting or market sell, the blue column is offer lifting or market buy.
For example, if we have our key area where we want to trade to the long side. We would need to see (ideally):
- Sellers selling into lows, large quantities of 300+. While not actually allowing price to fall
- Buyers stepping in with large quantities of 300+ and moving price up.
This would dictate the reversal move for the long.
If you want a full explanation with examples of how this concept works check out:
This is a raw form of reading market orders and volume that actually moves the market, a concept that can be used in ANY market condition.
Section 5: Trend-Following Strategies
In the next few sections, we’re going to break down consistent futures trading strategies in any market condition.
Trend-following strategies are effective during trending markets when prices consistently move in a specific direction. This can be seen when the price escapes a balanced area of distribution either to the downside or the upside. Typically, an effective strategy is waiting for the price to open outside of the distribution on the US open session. This is at 9:30 AM EST time, if the price is opening above or below the larger balance, the expectation is for the price to stay imbalanced and continue the direction of that move.
Typically these moves can open and then pull back to the distribution ledge for a continuation. You do want to understand how the depth of market trades at the ledges when the price comes back into them to confirm if there are indeed strong buyers for the longs or strong sellers for the shorts.
Above is an example of a larger distribution, it can be broken down into 2 main distributions. However in this case lets use the larger distribution. The bottom end is 4382. It might be harder for you to see it here, but here is what it looks like with candle sticks. Break and retest of 82 based on the distribution escape into imbalance and continuation lower.
Another effective order flow strategy to confirm the trend is to watch how the distribution ledge actually breaks. Will it break on a strong market bid or offer to actually give you confidence that the direction of the trend is going to hold out the break.
Combining these techniques with proper risk management can increase the probability of successful trades in trending markets.
Section 6: Range Trading Strategies
Range-bound markets require a different approach, focusing on profiting from price oscillations within specific levels. One popular range trading strategy is mean reversion, which involves identifying overbought or oversold conditions and trading with the expectation that prices will revert to their mean. Traders can use distribution theory to identify these conditions. Additionally, identifying support and resistance levels and trading reversals at these levels can be effective for range-bound markets.
These are the ledges of larger distributions where price is expected to hold the highs & lows based on a volume profile. Take into consideration the example below with the 4404-4424 distribution. Price holds the top and the bottom of this range until we finally break it, this break can be found on strong market participants (DOM).
Section 7: Risk Management and Psychology
Regardless of the market condition, effective risk management and maintaining the right mindset are crucial for consistent success in futures trading. Implementing proper position sizing, setting stop-loss orders, and using trailing stops can help control risk and protect capital. Additionally, maintaining discipline, managing emotions, and sticking to a well-defined trading plan is essential for long-term success. Developing a resilient mindset and being adaptable to changing market conditions will help you navigate challenges and remain consistent in your trading approach.
Mastering consistent futures trading requires a combination of understanding market conditions and implementing effective strategies. By aligning your trading approach with the specific characteristics of trending, volatile, or range-bound markets, you can increase the likelihood of success. Remember, proper risk management and a disciplined mindset are key to thriving in any market condition.